Preamble: The following is a SWAG and I will no doubt be wrong about plenty … yet I believe there is some basis for the following negotiation scenario and my speculation over forthcoming changes in China’s telecom industry. FWIW …

Apple negotiating team to China Mobile team:

“We’re coming out with a 3G iPhone and the chipset will support important world standard 3G protocols including TD-SCDMA including W-CDMA. And oh by the way, this new iPhone will be seriously “hack proof” (okay, much tougher to hack).

China Unicom tells us their CMDA mobile division is being acquired by China Telecom (TBA post Olympics). China Uniom will then merge with China Netcom and the combined company will be granted a 3G license and rights to build out the (proven) W-CMDA 3G network.They want an iPhone exclusive and they’re making a compelling pitch to us:

1)They say W-CDMA 3G is going to eat TD-SCDMA for lunch and they’re going to steal away millions of your most coveted subscribers … those on contract with a data-plan.

2)Unicom/Netcom wants to jumpstart their new TBA 3G mobile business by offering subscribers the most sought-after smart-phone for Net-surfing fun, “wow” audio/visual and intuitive UI – the iPhone.

3) Unicom/Netcom has heard the rumors about 400,000 unlocked iPhones on your (China Mobile’s) network. If we (Apple) sign an exclusive with them, they plan to offer iPhone subscribers very competitive rates and an unlimited data-plan option. Say good-bye to 9 out of 10 of your iPhone customers.

We know that you’ve (China Mobile) been growing subscribers at a clip of 5 to 8 million per month. Congratulations! We also know that despite this growth, your average revenue per user (ARPU) has not hit your targets. We understand that a key strategy for China Mobile is to grow your value added services (e.g. Monternet platform and other mobile data services). And finally, we know how critical mobile TV and delivery of video is to your future growth plans.

There is no phone that offers audio/visual and boosts data use like the iPhone! … Ask Google or any carrier who has officially launched iPhone.But then again, we know you’ve already asked … Net surfing increases 50 times and overall data-usage doubles or triples!

The iPhone is not a prisoner to fixed buttons.It runs OSX and software upgrades allow iPhone to evolve.It will only get cooler. You don’t need to spend a dime (.7179 Yuan Renminbi) or lift a finger … we’re going to cover all costs and handle delivery of these upgrades … quick and simple via iTunes.We want to do the right thing and make these upgrades free to all iPhone owners. Software updates will improve user experience and encourage maximum data use. We are offering significant value here and this does not come without cost to Apple.All we are asking is a small share of your monthly data-plan revenues to compensate for this value and expense.A happy iPhone owner is a retained “on contract” customer!

There is one more important value-add that comes with iPhone … our amazing developer community! Wait till you see the SDK unveiling. Our software development kit (SDK) will bring a whole slew of new apps to iPhone. All Apple and developer community apps will be delivered via iTunes. Again, no cost to China Mobile. Showtime in a just few days! 谢谢开发商! “

End of pitch …

Now if competitive dynamics take too long to evolve in China (i.e. 3G licenses or restructuring of telecom industry are delayed into 2009), China Mobile might not feel compelled to capitulate (agree to any terms Apple may desire) … Not a problem for Apple.They can offer a fully sanctioned “unlocked” iPhone without an exclusive carrier deal. This distribution could easily be done via deals with D-Phone, Shenzhen Aisidi, Apple.com (China) online and via new Apple stores in China. It will be a premium-priced iPhone, but not above the price that black-market buyers are currently paying.

Carriers offering both a locked and unlocked option: I have received some justified critique for implying (via this post) that iPhone can be made hack proof. I will concede that for every lock there is a locksmith and while a next gen iPhone can be made more hack resistant, it will not be hack proof.

Don’t be surprised if we see a two-tiered offering for next-gen iPhone (ala Orange in France where law prohibits handsets from being locked to a network for more than 6 months) – a locked iPhone in each nation and an “official” unlocked iPhone at a modest premium price. If the premium is too high, black-marketers will engage in arbitrage (unauthorized unlocking options at a lower cost). If the premium is modest, or “just right,” buyers will opt for the “official” easily upgradable iPhone that will come with a warranty and w/o the need to hack or jail-break.

Again, the preceding “negotiation scenario” was guesswork and I am no doubt wrong about many aspects of the on-going (or not) iPhone in China talks.

Alcatel-Lucent and NEC will form a joint venture that will focus on Long Term Evolution, a major 4G technology, and the former plans to set up a research center in Shanghai for the 4G technology that will be compatible with China’s own 3G standard, the firms said yesterday.

LTE, a wireless broadband access solution, supports a download speed of about 200 megabits per second on handsets, 100 times faster than 3G, or third generation, technology. Users will be able to use LTE for high-definition video transfer and high-speed exchange. Under the joint venture, the two companies will pool their existing research & development resources and leverage expertise in key technologies such as Internet Protocol and multiple input/multiple output. More than 1,000 people will work for the venture. Both sides declined to reveal financial details.

“This strategic collaboration with NEC is driven by scale, time-to-market, and product excellence objectives and it will put us in a strong position to ride the next wave of transformation in the wireless industry,” Patricia Russo, chief executive of Alcatel-Lucent, said at a press briefing at the Mobile World Congress 2008 in Barcelona.

NEC is strong in both IT and telecommunications and the cooperation will ensure the company leads in “advanced wireless services globally,” Kaoru Yano, NEC president, said at the briefing.

“This is a smart pairing that will help accelerate the availability of LTE by capitalizing on early market implementation that we expect to occur in Japan and North America,” said Philip Marshall, who heads technology research at Yankee Group, a US-based research firm.

Japan-based NTT DoCoMo has already selected NEC as a vendor for commercial service deployment of its Super 3G (LTE) project and US-based Verizon has selected Alcatel-Lucent as equipment vendor to initiate a LTE trial program.

Alcatel Shanghai Bell’s staff won’t be included in the venture as China adopts its own 3G technology, said Michel Rahier, Alcatel-Lucent’s carrier-business group head.

China Mobile: 400,000 unlocked Apple iPhones on our network at end of 2007

Friday, February 15, 2008 – 03:28 PM EST

“The shock wave caused by the Apple iPhone has been spreading from the US to China at an unbelievable rate. Savvy entrepreneurs have been purchasing hundreds of thousands of iPhones in the US and Europe, then “cracking” the operating system to allow the device to be used on any GSM network. According to China Mobile, the biggest wireless carrier in China, there were about 400,000 cracked iPhones using its cellular network service at the end of 2007, representing one out of every 10 iPhone shipments announced officially by Apple. The figure surprised us as it is fourfold of that we estimated before,” Anty Zheng reports for In-Stat China.

MacDailyNews Take:There’s nothing like granting Steve Jobs massive bargaining power and carte blanche to negotiate from a position of strength.

“We have never doubted that the iPhone will achieve greater success than iPod in China if Apple teams with China Mobile to launch its Chinese version. There are two reasons. Firstly, different from the US where the smartphone market is fairly limited, appealing primarily to business users, The smartphone market in China, though, is an entertainment-oriented individual consumer market. The main reasons that Chinese mobile users purchase smartphones include entertainment (such as music players, cameras and video) and to access mobile Internet applications (such as IM, e-book, and games). We believe the iPhone will be favored by these consumers as it can better meet such demand. Secondly, high-end handset buyers significantly outnumber high-end mp3 player buyers. We estimate that 20% of handsets sold in China in 2007 cost more than 4,000 RMB (US$533). In another words, there are an estimated 28 million potential users for the iPhone in China.,” Zheng reports.

“Further, the iPhone is not just a successful product. In-Stat feels that the iPhone is leading the way to a new generation of smartphones that are very different from their older counterparts. One important trend is that revolutionary UI and UE, enabled by touchscreens and 3D sensor technologies, will be widely used in the next generation of smartphones in China and around the world,” Zheng reports.

“Also, the trend toward the mobile Internet will drive handset makers to deliver more smartphone models. More Internet applications, such as social networking, maps, search, and e-mail, will be developed for smartphones, and these will make the iPhone and other smartphones more attractive to mobile users who like to use their handsets to pass the time. In turn, the mobile Internet will become a new selling point for smartphones, and drive up sales. Taking the long view, In-Stat believes that the smartphone is evolving into a increasingly wide range of mobile devices, where cellular voice communications are just one function of the converged appliance,” Zheng reports.

MacDailyNews Take:Well, now, there’s a rotating, mile-high by mile-wide, blinking neon billboard screaming “Apple’s iPhone will rule the world!” One question remains, of course, is that large and bright enough for Wall Street to finally be able to see it, read it, and understand what it means?